We have summarized some of our best sessions from past trading events and coupled them with the videos used to produce the summary. Hopefully this can help you browse through the content and learn from both reading and watching this session. Today's trading education session features our own Rollie White, the Head Brew Master here at the TradingPub. In this education segment he will share:
- The pros and cons of day trading the futures market
- Three skills that every trader must master
- Charting techniques that may give you an edge
- Which futures markets are the best for day trading
- Strategies for trending and sideways moving markets
PROS OF DAY TRADING THE FUTURES MARKETS
Rollie White starts by sharing some of the advantages of day trading the futures market. Those include lower capital requirement, such as $3-$5 K starting balance, the fact that the funds are in margin accounts and can be traded with a great leverage. Further, when trading futures you can trade a wide variety of vehicles including: stocks, indexes, currencies, interest rates, energy, metals, other commodities. Those diversified opportunities along with the opportunity to gain from the high leverage, without risking too much of your finds, are some of the main reasons why Rollie decided to start in this market.
He was glad to discover that he can open and close a position within the same trading session and incur no overnight risk. This is another great feature allowing for smaller day trading margins versus higher overnight ones. In addition to the above stated reasons one has to consider that trades sometimes last only a few minutes, leaving you a whole lot of time to enjoy your days. Additionally, this particular style of trading can help you eliminate the noise from all exterior sources and allow you to trade with only what you see versus what you think may happen. Basically you are reacting to the market instead of thinking too much because of what you think may happen.
If you are not familiar with fundamental analysis you may get overwhelmed thinking about all the aspects to consider before making an educated decision about a given investment. Balance sheets, income statements, projected sales and potential losses and other details. Fundamental analysis can get pretty involved and scary and may deter people from becoming traders. Day trading the futures market, however, does not directly involve fundamental analysis. Generally speaking, the current trading price reflects what is known about a company and futures traders can focus on technical analysis to minimize risk and maximize profits. Or you can simply trade an index, surpassing the fundamental analysis in that way. Further, day trading futures allows a trader to establish a short position as easily as a log position and all for fairly low commissions, comparatively to other markets.
CONS OF DAY TRADING THE FUTURES MARKETS
One of the main downfalls of day trading futures, according to Rollie, is that you can lose money fast if you are not prepared with a strategy and plan of action. Leverage can be a great advantage, but can also work against traders who are not experienced. Rollie often engages in very quick trades with entry and exits all executed within minutes of each other. When trades take only minutes is it possible that traders can perform a number of successful trades throughout a trade session. In cases like that gaining more and more confidence can actually lead to taking unreasonable trades with higher risk than the one an account can afford and has lead to many failures among traders in the past.
When you combine the fact that the markets are moving fast with leverage, emotions like fear and greed can quickly come to the surface and interfere with your ability to logically trade the market. Another shortfall of day trading the futures market is the search of a strategy that has better return that the one used up to a given point. That constant search of the "Holy Grail" strategy can often become a problem.
The takeaway from this segment, according to Rollie, is that when evaluating the pros and cons of day-trading the futures market the pros far outweigh the cons, that is why he continues to trade and teach about that market even today. A valuable lesson Rollie once learned was that 90% of what it takes to be a consistent day trader is being able to control your emotions. If you can do that you will be able to succeed.
THREE SKILLS THAT EVERY TRADER MUST MASTER
The presenter shares three simple skills one has to master to be able to trade. Those include:
- The ability to Determine The Direction Of The Market
There are only three options here and even thought it sounds very over-simplified, it is important to determine the direction of the market correctly and learn to understand it, so you can use it in your trading and apply proper strategies. Those directions are:
- Select The Best Strategy
Based on the direction of the market you have to select an appropriate strategy given the specific conditions.
- You can select trend-following strategy if the market is going up or down
- Or you can select a trade-fading or scalping if the market is moving sideways
- Use Trade Management To Minimize Risk And Maximize Gains
Once you have understood the direction of the market and have determined your trade strategy, then you can start looking for
- Where the high probability entry and exit setups are
- Then you can enter the market with a predetermined profit target and stop loss settings, which will help eliminate emotion once you have entered a trade.
The takeaway from this segment is that mastering those 3 fundamental skills, among others, can help traders become consistent when trading and consistency is a great stepping stone for success.
CHARTING TECHNIQUES THAT MAY GIVE YOU AN EDGE
The question here is "Are there any techniques that may give you an advantage when analyzing the market?". According to the presenter, there are some tools that can indeed give you an edge.
The most popular choice among charting techniques are the time-based charts that include 1 to 60 minute charts. Less popular are volume based charts representing the number of contracts traded in a given security for a given period of time. Some of the less known techniques involve using the price volatility charts. Those include range bar, momentum and breakout charts and indicators, and is where an edge can really be formed.
For example, the image below depicts a gold chart using 5 minute time frame. You can see a down move in the middle of the selection, but by using this chart alone it will be hard to decide the exact entry and exit positions. Using only this time chart can lead to a lot of missed opportunities.
On the other hand, if you are using a 20 tick range bar chart with the same time increment, as the one below, you can see that the red bars are clearly indicating a downward move and it may be easier to act on it with 6 consecutive downward moving bars.
It is this charting technique that Rollie believes can give you an edge in the market. If you look at a range bar chart, such as the one depicted above, the market entries are based on the price movement, not time of volume. A number of traders do not like to include volume and time in their analysis anyway, and that is why this type of chart can work great for them. Each bar represents exactly the same length and it is easy to see when a new bar starts. It also eliminates a lot of external noise, making it easier to determine market direction. Further, this type of chart better supports the use of limit orders for more precise entries. In addition, this type of chart gives you an edge since fewer traders use price volatility. Lastly, orders appear at random intervals making for potentially easier fills. For example, if the whole world was trading in 15 minute intervals, that means that every 15 minutes there will be a ton of orders coming in at the same time. When you trade you will see activity spikes around given time frames, based on the time frames you are looking at. However, when you look at price only you can see that there is more randomness, vs. expecting an activity spike, thus trade.
Indicators are all designed to take in consideration prior data and aid in predicting a future event. That is why most of them are lagging. There are many types ranging from oscillators to moving averages, but in Rollie's case he wanted to keep things simple and use indicators that helped with market direction such as:
- Bollinger Bands, which help indicate the direction of the market
- MACD (Moving Average Convergence Divergence), which confirms if the market is in bullish or bearish condition
- RSI (Relative Strength Indicator), which shows the relative strength of the market move
Additionally, prior areas of support and resistance are important to keep an eye on. Previous and current day's high and low, main resistance and support to pivot points are also recommended by the presenter.
Here is visually how all of that is applied. First we have a chart with range bars only, those are 8 tick bars and the market depicted is the S&P 500. Even though it gives us some basics on the market, it is still bland and not enough to really help us and give us an edge in picking a position to enter a trade.
If we add the upper and lower Bollinger Bands, as seen below, you can now tell more about the market. For example, if the bands are pointing up at a 450 angle and leading prices, meaning prices are inside the band, this is a strong indication that prices are moving up. Conversely, if the bands are at a 450 angle pointing down and prices are leading, then we have a strong indication that the market is headed down.
The next indicator here is the MACD (Moving Average Convergence Divergence), which helps to understand if the market is in bullish or bearish condition. If the MACD is above the moving average and if the line is above zero, lets paint the line green the tick bars green. This indicates, that the market is in a bullish condition. Let's paint the bars red if the MACD is below the zero line and below the signal line. All black bars indicate that the market is in transition.
The next indicator that Rollie usually adds to his trading charts is the Relative Strength Indicator, which allows him to decide how strong a move in each direction really is. It is added to the bottom of the chart, as seen below. It is also programmed to show with green errors when the RSI is above 70%. Those are the bars with green triangles below each bar. The red triangles above the red bars indicate that the RSI is below 30%.
Then we add the pivot points, and previous day's high and low. Those work a bit like a self-fulfilling prophecy and that is why those levels are important to be seen. Also, in the picture below the first two hours of trading, Rollie's favorite to trade, are highlighted in yellow. This is how his final chart looks daily.
WHICH FUTURES MARKETS ARE THE BEST FOR DAY TRADING
There are a lot of choices out there…You can trade currencies, commodities and even futures on the weather. However, one of the main criteria for choosing a suitable market is that it has a good volume and volatility. Some of the best markets to trade, though this is subjective based on Rollie's experience include the following few examples. If you are new to the market and have an account between $3 and $7 k these three markets represent Rollie's top picks:
- E-mini Dow (YM): 1 tick = $5.00
- E-mini Nasdaq (NQ): 1 tick = $5.00
- 10-Year Notes (ZN): 1/2 tick = $15.63
The reason is partly because the moves are less expensive per tick in the E-mini Dow and Nasdaq, and to diversify you can include the 10 year note. This markets are subjective, however, but the strategies Rollie shares later can be applied to other markets and used with the same success. Those markets provide an interim step to trading from demo to the live markets without putting yourself in too much risk.
For intermediate traders and account sizes of $7-$10k then some suggested markets include:
- E-mini S&P 500 (ES): 1 tick = $12.50
- 30- Year Bonds (ZB): 1 tick = $31.25
- Euro FX Futures (6E): 1 tick = $12.50
Those are very liquid and volatile markets and include the Euro FX futures, which is not an over-the-counter FX trading, but a futures trade to diversify.
For advanced traders with accounts of more than $10k you can take a look at the following markets where you can benefit from a great potential for returns due to high liquidity and volatility:
- Namex Crude Oil (CL): 1 tick = $10.00
- Comex Gold (GC): 1 tick= $10.00
- E-mini Russell (TF): 1 tick= $10.00
There are a great number of other futures investment vehicles that can be traded, but those 9 can be a great foundation for intraday trading a variety of markets and use the strategies shared later.
Rollie White trades the following markets on a daily basis:
Because each market has different moves and characteristics, there is not one universal range bar chart that works well for all, so he specifies the range bars for each traded investment in the table above.
STRATEGIES FOR TRENDING AND SIDEWAYS MOVING MARKETS
Here are a few strategies that can be used based on whether the market is moving up, down or sideways. The first one, as shown in the image below, is for a market that is trending up.
With this strategy the risk to reward ratio to be 1:1.5 with more than 50% winning percentage. Basically you would be making $1.50 per each dollar you risk, more than 50% of the time. The profit target with this strategy is 15% of the Average Daily Range (ADR) and the stop loss is about 10% of the ADR.
In the example, depicted above, we are looking for the first green bar with RSI above 70%, the one that has a green triangle below the line. In this case, which is a great feature of range bars, the entry point is in the middle of the second bar with RSI above 70%, which in our case is 1321.7. We also want to confirm that the Bollinger Bands are leading up at 45o angle and we will place a stop order 1 tick above the range bar. In this particular case we are entering with a 30 tick profit and 20 tick loss. So in gold and crude each tick is $10, so the target profit is $300 and loss is $200.
Below is a is a short entry example. It has the same risk/reward ratio and a 50%+ winning percentage as the strategy shared above. It profits about 15% of the average daily range and the stop losses are set at 10% of the ADR. The execution here is similar to the strategy above. When you see the first red bar with a red triangle indicating that the RSI is below 30% and the BB is leading price lower at a 45o angle you can set your stop loss order one tick below the range bar. This example involves crude oil and each tick is $10, so we are risking 20 ticks to make 30.
Lastly here is a strategy that you can use for a sideways moving market conditions. The risk to reward ratio here is 4:1, but the target winning percent is 80%. In other words, you are risking $4 to make $1, but there is an 80% chance that you will make the dollar before you lose the $4. Further, the profit potential is set at 25% of the length of the bar and the stop loss is set at 100% of the bar range.
The filter that we are looking for is a 2 bar pullback and RSI above 40%. Here we can see that the Bollinger Bands are flat or the market is showing a long-side bias. Two or more bars are closing higher followed by 2 bars closing lower. The buy limit is 1 tick below close of 2nd retracement bar.
Let's look at a short entry of a sideways trending market. We have the same risk to reward as above and same winning probability. The profit is also the same, as in the trade shared above, at 25% of the length of the range bar and the stop is at 100% of the length of the range bar. We are looking for the Bollinger Bands to be flat or showing a short-side bias. We are also looking for 2 or more bars closing higher and sell limit order 1 tick above close of the 2nd retracement bar.
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